CHAPTER - II DEVELOPMENT AND ADMINISTRATION OF INCOME- TAX IN INDIA

Transcription

1 CHAPTER - II DEVELOPMENT AND ADMINISTRATION OF INCOME- TAX IN INDIA 2.1 Introduction: Income-tax is a tax of Central Government which is collected by taxing income earned by the persons. For the purpose, the Central Government has passed a separate Act i.e. Income-Tax Act, 1961 under which the procedures of taxing the incomes of the persons and collection of income-tax has been envisaged. The Act gives definition of person and explains how its residential status should be decided. Tax incidence on an assessee depends on his residential status. The Central Government under its yearly financial budget decides the rates of income-tax to be charged on taxable income of person. For the proper administration and collection of income-tax, the government has formed a separate department known as Income-Tax Department which is solely responsible for collection of income-tax and completing all the procedures in this regard. 2.2 Indian Tax System India has a well developed three tired tax structure. It comprises of the Central Government, the State Governments and Local Bodies (includes Gram-Panchayat, Municipal Corporations, and Corporations). In accordance with the provisions of Indian Constitution the power to levy and collect taxes is entrusted to these bodies. Accordingly these bodies are empowered to levy and collect following taxes. 20

2 Central Government - Income-Tax (except agricultural income-tax) Corporate Tax Custom Duties Central Excise Duty Sales Tax - Value Added Tax (on inter-state sale of goods) - Service Tax Tax on Capital Gain Securities Transaction Tax Service Tax State Governments - Sales Tax (on inside state sale of goods) Land Revenue Taxes on Agricultural Income Stamp Duty (on transfer of property) State Excise (on manufacture of alcohol) Duty on Entertainment Profession Tax Local Bodies - Property Tax or Building Tax Octroi Tax on Markets Tax or user charges for utilities (e.g. water supply, drainage, etc.) 21

3 2.3 Historical Review India is presumed to be one of the oldest civilizations of the world. Various references from the Hindu dharmashastra and its literature has shown that there was a taxation in one or another form from very beginning of the civilization, though the nature, scope and objectives were different at different stages of its development. The evaluation of income-tax in India can be studied in the following stages: Vedic Period During Vedic period there are references which show that taxes were collected in one form or another. King was the sovereign authority to levy and collect tax. Tax collected from public formed part of State s Revenue. The references about sacrifice, argument for progressive taxation are found in the Institute of Manu. Near about 1200 B.C. Manu had said that equal severity upon every individual is required to make the burden of taxes equal 1. In those days the largest share of public revenue was from a share of the agricultural produce. Certain taxes on commerce, a trifling were levied on street traders. No references of imposition of super income-tax found in this period. Mauryan Period During Mauryan Period, taxation had got importance for meeting the expenses of administration. The well-known Kautilya Neeti was presented by Arya Chanakya (Kautilya) in which the reference of a well planned and systematic approach to levy and collect taxes for the state exchequer is found. Land tax, taxes on houses in cities, contributions for maintenance of troops during 22

4 war, duties on sale of goods in markets, taxes on imports and exports and other taxes on incomes of persons engaged in professions other than agriculture were some of the taxes introduced by Kautilya 2. Period of Kings and the Rulers: During the days of kings and the rulers taxes were not collected for the development of the economy, but were imposed and collected much for personal needs of the kings and maintenance of army for internal peace and protection from foreign aggression. Mughal Period: During Mughal period demand on agricultural produce was the main source of State s Revenue. It was 1/5 th of the Gross Produce. Other revenue heads were import duties, State s share in the spoils of the war, imposts on mines and treasure troves, etc. 3 Aurangazeb, one of the Mughal Emperor taxed ziziya Kar on all kaffirs (non-believers). Evidences found show that the Mughal Emperor Akbar, had taxed boatmen for the waves they made on the river water. It reveals that indigenous governments ruled in India were well familiar with direct taxation. Period of East India Company: During the period of East India Company, land revenue was the main source of revenue. During this period tax system was designed to protect and enlarge the interest of the East India Company and the British Crown. 23

5 British Colonial Period: In India, Sir James Wilson for the first time, imposed Income-Tax; in the year This tax was introduced to meet the losses suffered by Military Mutiny of At that time charging income-tax was very simple matter. Thereafter various minor amendments were made to Income-Tax. And finally in the year 1886 a new Act was passed which properly framed Income-Tax System. Under the act income-tax was charged on a flat rate of 5% over the income Rs. 2000/- with a rate of 4% on salaries between Rs. 500/- to Rs. 2000/-. At the same rate Interest on Securities was also taxed. 4 In 1916, eight different rates of tax were prescribed for different income groups. In 1917, additional income-tax was introduced as Super tax. A peculiar feature of this Act was the tax on the income of a year is calculated and collected in the same year itself. However, in 1922, the All India Income-Tax Committee recommended and passed The Indian Income-Tax Act, Under this Act, in 1924 the Central Board of Revenue was established. In 1939 considerable and significant amendments were made to this Act. One of the important amendments is slab rate system for charging income-tax was introduced on the recommendations of the Income-Tax Enquiry Committee (1936) Period of Independence Period of mixed economy: ( ) After Independence India has accepted mixed economy structure for its economic development under which five year plans were introduced for the purpose of economic development and equal distribution of wealth among the people. 24

6 Though various amendments were made in Income-Tax Act, the basic structure of income-tax was remained technically unaltered. The taxation imposed was built on British Model. Therefore after independence in 1947, it was expected to undergo a fundamental change. After Independence India had become an independent democratic republic nation. It is governed in terms of the constitution which came into force on 26 th Jan, In the Taxation Enquiry Commission estimated tax evasion of Rs. 50 crores, while Prof. Nicholas Kaldor estimated it as Rs crores. Kaldor suggested to thorough and comprehensive reform of Indian tax system. Accordingly in 1956 Indian Government referred Income-Tax Act, 1922 to Law Commission. In the mean time the government appointed the Direct Taxes Administration Enquiry Committee to simplify the Act and to prevent tax evasion. Afterwards The Central Board of Revenue appointed a separate committee to consider the reports both of the Law commission as well as the Direct Taxes Administration Enquiry Committee. After the study of both the reports in April 1961 in consultation with the Ministry of Law, the Income-Tax Bill, 1961 was introduced in Parliament which was passed in September, 1961 and the Income-Tax Act, 1961 came into force. 6 Period of New Economic Reforms: ( after 1991) Income-Tax Act, 1961 is in operation for about half of a century with additions, alterations, modifications, insertions, omissions, explanations and with supporting Schedules to the Act for various reasons like requirement for additional revenue, 25

7 simplification of tax law, decisions at a number of court cases, changing economic and political situation, recommendations made by a number of Enquiry Committee and economics. Since year 1991, Indian tax system has under gone a drastic change in accordance with liberal economic policy and WTO commitments of the country. The government set up a special committee, the Raja Chelliah Committee on Tax Reforms, to review the country's tax system. This committee recommended, to reduce customs and excise duties, to lower corporate tax rates, to levy taxes on services like insurance, telephones etc., to simplify income-tax return filing procedures. Government approved various committees and commissions with various goals and objectives. Marginal tax rate and number of rate categories were reduced since and better compliance is to be achieved. In , MAT (minimum alternate tax) is introduced due to which zero tax companies were minimized. Number of company assessees were increased with increase in direct tax revenue to government. TDS (tax deducted at source) is also an important reform due to which hard to tax group came under tax net. 7 The performance of income-tax can be evaluated, in relation to direct tax collection and number of assessees. The following table no. 2.1 demonstrates the trends in direct tax collection classifying the same into corporate tax, personal income-tax and other direct tax. 26

8 Financial Table No. 2.1 Direct Taxes Collection (amounts in crores Rs.) Actual Collection Total Year Corporate Tax Income-Tax Other Direct Tax Source: From table no. 2.1 it can be seen that income-tax revenue to total tax revenue of the Government, is increasing continuously. Per capita tax revenue is also improving steadily. It can be seen that personal income-tax was reduced to Rs crores in from Rs crores in due to tax evasion cases. Remedial actions were taken for tax evasion and thereafter personal income-tax is increasing continuously. The foregoing table no. 2.2 shows that with the increase in direct tax revenue of the government, number of assessees also has gone up by

9 times between the period and Total number of assessees were 1,16,43,543 in the year which are increased to 3,26,50,627 in the year The details are as under: Table No. 2.2 Number of Effective Assessees Year Co. Individual H.U.F. Firms Trusts Others Total Source: Due to economic reforms growth rate of economic development has increased. Standard of living of people is also increased as their earnings are increased. From the table no.2.2 it can be easily observed that number of assessees are increasing continuously. Majority of these assessees are availing services from tax consultants in compliance of tax matters. The present study is restricted to individual, partnership firm and company assessees. Income-tax related to individual assessee is called as 28

10 Personal Income-Tax and income-tax related to company assessee is called as Corporate Tax. Tax rates in details are as under: 2.4 Personal Income-Tax The income-tax is levied and collected according to the residential status of an assessee. While levying income-tax the principles of progressive, regressive or proportional are used. A progressive tax levies progressively higher tax rates as earnings reach higher levels. A regressive tax levies income up to a certain amount, e.g. tax on first Rs. 1,00,000/- earned. Flat tax method taxes all earnings at the same rate. For different types of income different methods of taxation may be used. In India up to 31 st March 1939, higher the income, higher the rate i.e. tax is to be charged on whole amount of total income at the rate applicable to the step in which the total income falls. Thereafter Slab System of Taxation method is adopted. In this method income is divided in different slabs and there is a separate rate of tax for separate slab. Initially in this slab system two sets of income groups were provided one pertaining to income-tax-payers and the other pertaining to the super tax-payers where in the tax-payers were divided into income-taxpayers whose total income was below Rs. 25,000/- and super tax-payers whose income was above Rs. 25,000/- and charged accordingly at two separate rates. 8 This system continued until the assessment year when super tax was merged into income-tax and nine slabs were provided. The first slab was of income below Rs. 5,000/- and maximum tax of 65 % is for income above Rs. 70,000/-. This Tax structure continued till the assessment year In slabs and slab rates were revised. For this year maximum marginal rate of 75 % was prescribed for incomes exceeding Rs. 2,50,000/-. In , first time NIL slab was introduced. But the marginal rate of income-tax including 29

11 surcharge was the highest at % on income exceeding Rs. 2,00,000/-. In assessment year again slabs and slab rates were revised on the recommendations of The Direct Taxes Enquiry Committee headed by Justice K.N. Wanchoo. Marginal rate of tax including surcharge has been reduced to 67.5% and continued to be same till assessment year This rate was reduced to % in and to 50% in assessment year Though the rates of taxation imposed were very high, the yield was not proportionately high. Tax evasion was the principal reason. Salaried group, who cannot conceal its income, was the only honest tax-payer group. Due to high rates of income-tax economy witnessed extensive tax evasion and rise of black money. As such, as a policy matter there has been continuous reduction in income-tax rates. Policy was adopted during last two decades to avoid tax evasion and rise in black money. In the assessment year , the exemption limit was Rs. 22,000/- and maximum 50% tax was levied on the income above Rs. 1,00,000/-. In , the exemption limit was Rs /-. In assessment year exemption limit was raised to Rs. 40,000/- and above Rs. 1,50,000/- 30% tax was levied. The exemption limit was raised to Rs /- in This limit was again raised to Rs. 1,00,000/- in In the assessment year exemption limit was Rs. 1,10,000/- and maximum 30% tax was levied on the income above Rs. 2,50,000/-. In the year exemption limit was Rs. 1,50,000/- and maximum 30% tax was calculated on the income above Rs. 5,00,000/-. For assessment year exemption limit was 1,60,000/- and the maximum tax was of 30% on the income above Rs. 5,00,000/-. For assessment year exemption limit was 1,60,000/- and the maximum tax was of 30% on the income above Rs. 8,00,000/-. In 30

12 addition to this certain percent of tax on total tax of the assessee is levied as super tax and education cess Income-tax rates for partnership firms: In Income-Tax Act, firm, partner and partnership have the separate meaning, but while calculating the taxable income of the firm, any interest, salary, commission, bonus or other remuneration paid to any partner is not allowed as deduction. Firm s total income shall be calculated as like profits and gains of business or profession. For this purpose Act contains certain deductions which are expressly allowable from firm s income. The Act also contains certain expenses which are expressly disallowable. With these there are some other deductions which are allowable on the basis of general commercial principles. Income earned by the firm from the source other than business income is to be added in the income of the firm and the total taxable income of the firm can be achieved. Whole amount of profit earned by the firm is taxable. Previously there were slabs for rate of income-tax for partnership firms too. For assessment years to first Rs. 1,000/- were tax free, next Rs. 24,000/- were taxed at 5% and income above Rs. one lakh was taxed at 24%. Thereafter in assessment years to Rs.10,000/- were tax free. Nowadays all the firms are taxable at flat rate of income-tax. Rate of income-tax for partnership firm from assessment year to are as follows: Table No. 2.3 Income-Tax Rates for Partnership Firm A.Y to Year Rate of Income-Tax to % to % to % 31

13 2.6 Corporate Tax: Corporate tax is the most important tax of all direct taxes imposed by central government. It is a tax imposed on the income of the companies. The rates of corporation tax were different for domestic companies and foreign companies. There are no slabs as in personal income-tax. Income of the companies is taxed at flat rate. The rates of corporate tax were quite high till the year 1991, but after adoption of new economic policies in the year 1991, to stimulate growth process and to achieve foreign investments, rates of corporate tax were reduced gradually. During the assessment years to rate of income-tax was 45%, which was reduced to 40% in This rate was continued up to assessment year In the assessment year this rate was reduced to 35% and again in the rate of corporate tax was reduced to 30 % and till then it was pegged at 30% Tax Revenue of the Central Government: The tax revenue collected by the Central Government of India contains both types of taxes i.e. direct tax and indirect tax. Direct taxes include share of income-tax along with the proportionate share of each type of tax in total tax revenue of the Government. The details of last 40 years can be seen from the following table no

14 Table No. 2.4 Central Government Tax Trends: to (amounts in Rs. crores) Year Total Direct Tax % in Total Tax Total Indirect Tax % in Total Tax Total Central Tax Revenue (RE) (BE) Note: i) Total Direct Taxes and Indirect Taxes include Other Taxes. ii) Data for are Revised Estimate and Data for are Budgeted Estimates. Sources: 33

15 2.8 Income-Tax Administration From very imposition of income-tax by British rulers in India in the year 1860, the income-tax was administered and collected by the Provincial Government till the year In 1922, when a separate Income-Tax Act was passed, separate provisions for administration were made. It was made under which Board of Inland Revenue was provided to perform the duty of making rules and administering the tax. In 1924, this Board was replaced by Central Board of Revenue 12. With the growing complexity of income-tax administration Central Board of Direct Taxes was constituted under Central Board of Revenue, Central Board of Direct Taxes is the apex body in the Administration of income-tax. It works under the Finance Ministry. It executes all those functions prescribed under the Act as well as entrusted by the Finance Ministry. It consists of a number of members appointed by the Central Government. It has certain powers conferred upon it by the Income-Tax Act. The board for proper administration of the Act may issue such orders, instructions and directions to other income-tax authorities as it may deem fit. For efficient management of work of assessment and collection of revenue it may issue general or special orders to be followed by Income-Tax Authority. Functional Area: The Board has divided its functions under three subordinate authorities viz. administration, assessment and judicial for its proper working. Table No given below shows the hierarchy of authorities

16 Table No. 2.5 Central Board of Direct Taxes For Administration For Assessment For appeals Director General of Income-Tax Chief Commissioner of Income-Tax Director of Income-Tax Commissioner of Income-Tax Joint Director of Income-Tax Joint Commissioner of Income-Tax Assistant Director of Assistant Commissioner Commissioner of Income-Tax of Income-Tax (A.O.) Income-Tax(Appeals) Income-Tax Officer (A.O.) Joint Commissioner of Tax recovery Officer Income-Tax (Appeals) Inspector of Income-Tax 35

17 Administration: Administrative authorities look into the matter of proper administration of Income-Tax Act, Assessment: Assessment authorities make assessment, collects tax revenue. Appeals: Judicial authorities hear and dispose off the appeals against judgments of Income-Tax Officers. Director General (DGIT) or Chief Commissioner (CCIT) Director General of Income Tax (DGIT) or Chief Commissioner of Income Tax (CCIT) are appointed by Central Government and perform the functions assigned by the Central Board of Direct Taxes. They can appoint income-tax authorities below the rank of Assistant Commissioner. They can exercise powers of a court for making any enquiry or investigation into concealment. Commissioner of Income-Tax or Directors of Income-Tax Commissioner of Income-Tax or Directors of Income-Tax are appointed by the Central Government. They can appoint, assign jurisdiction and functions to Inspecting Assistant commissioners and Income-Tax Officers and can give instructions to them. They have powers like making enquiry, transferring of cases, search and seizure etc. Joint Commissioners Joint Commissioners are also appointed by central government. Their main duty is to detect tax evasion and supervise subordinate 36

18 officers. They have powers of making enquiry, call information, survey, search and seizure etc. Commissioners (For Appeals) The Commissioners of Income-Tax (Appeals) is an appellate authority. It is appointed by the Central Government for disposal of Appeals. They have powers regarding discovery of evidence, call for information, inspect registers of companies etc. Income-Tax Officers Class-I Income-Tax Officers are appointed by the central government and class-ii officers are appointed by Commissioner of Income-Tax. They perform their functions within the jurisdiction of Assistant Directors or Assistant Commissioners. They have power of discovery and production of evidence, search and seizure, survey, make assessment, grant refund etc. Inspectors of Income-Tax Inspectors of Income-Tax are appointed by the Commissioner of Income-Tax. They are subordinate to Income-Tax officer and other higher authorities under whom they work and perform functions assigned to them by superiors. 2.9 Important Concepts and Definitions: 1. Assessment Year Assessment year means a period of 12 months commencing on 1 st April and ending on 31 st March of the subsequent year. Income earned in financial year is taxed in assessment year. Assessment year succeeds the financial year. 37

19 2. Accounting Year / Financial year / Previous Year Accounting Year or Financial year is also known as previous year. It means the year immediately preceding the assessment year. Generally previous year consists period of 12 months, only in case of newly set up during the financial year business, this period shall be beginning on the date of setting up of the business and ending with the said financial year. 3. Assessee : An assessee is a person: i. From whom any tax is payable under the Act ii. From whom any other sum of money (such as interest or penalty) is payable under the Act iii. Against whom any proceedings under the Act have been initiated for the assessment of his income or loss or of amount of refund due to him iv. Who is deemed to be an assessee i.e. representative assessee such as guardian of a minor or manager of a lunatic or agent of a nonresident v. Who is deemed to be an assessee in default i.e. a person who has failed to discharge any obligation under the Act e.g. deduction of tax at source, payment of advance tax etc. In simple terms an assessee is a person who is liable to pay income-tax, interest and / or penalty for his own income or income of other person. The term assessee also includes the person whoever failed to follow any obligation under the Act. 38

20 4. Assessment Term assessment is not defined in Income-Tax Act, The Act only states that it includes re-assessment. Assessment means computation of total income earned or loss suffered by the assessee during the financial year and the amount of tax payable by him or refund payable to him. 5. Income : According to section 2(24) of the Income-Tax Act, 1961 income includes: i. Profit and gains ii. Dividend iii. Voluntary contributions received by charitable institutions, religious trusts, research associations etc. iv. Any allowance granted to employees v. The value of any perquisite or profit in lieu of salary taxable under the salaries vi. The value of benefit or perquisite obtained by a director or a person substantially interested in a company vii. Income chargeable under the head profits and gains of business or profession viii. Capital gain ix. Profit and gains of insurance carried on by Mutual Insurance Company or by a co-operative society, computed in accordance with provisions of section 44 of the Act. x. Winning from lotteries, betting, cross-word puzzles, gambling, horse race etc. It includes prizes won in TV / game shows xi. Employers contribution to provident fund or super-annuation fund or other such fluids 39

21 xii. xiii. xiv. Any sum received under Keyman Insurance Scheme including bonus The contribution made by the central government in the previous year to the account of employees under a pension scheme referred to in section 80 CCD Cash gifts received from non-relatives exceeding Rs /-. From immovable property, movable property transferred without or with inadequate consideration is taxable in the hands of recipient (donee) The definition of income lists the items which are treated as income. This definition is not an exhaustive, but an inclusive one. It means any other kind of earnings not mentioned in the list of income is also to be included and to be treated as income. 6. Person : The term person includes - i. An Individual ii. A Hindu Undivided Family iii. Partnership Firm iv. A Company v. An Association of Persons vi. A Local Authority vii. Every Artificial Judicial Person The definition of person given by the Act is very simple. It includes natural human beings as individuals and other persons who are established under various Acts. Legal status of the assessee i.e. whether the assessee is a firm or company or artificial judicial person etc., is very important in 40

22 determining assessee s tax liability. The tax rates are different for different legal status of the assessees. 7. Total Income: According to Income-Tax Act, incomes earned are classified and assessed under five heads viz; i. Income from salary ii. Income from house property iii. Profits and gains from business or profession iv. Capital gain and v. Income from other sources Total of these five income heads is called as Gross Total Income. 8. Taxable Income: After claiming deductions under chapter VI-A from gross total income, Taxable Income of the assessee is arrived at. This is explained in the following table no

23 Table No. 2.6 Computation of Taxable Income Name of the Assessee : Status : P.A.N. : Assessment Year : Previous Year : Particulars Rs. Income from salary *** Income from house property *** Profits and gains from business or profession *** Capital gain *** Income from other sources *** Gross Total Income *** Less: Deductions under chapter VI-A (if any) *** TAXABLE TOTAL INCOME *** 42

24 REFERENCES: 1. Vinay Kumar (1988), Tax System in India and Role of Income-Tax, Deep and Deep Publications, New Delhi. (page 25) 2. National Website of Income-Tax Department of India 3. Vinay Kumar (1988), Tax System in India and Role of Income-Tax, Deep and Deep Publications, New Delhi. (page 25) 4. Mehrotra H.C.(1969), Income-Tax Law and Accounts, Sahitya Bhavan, Agra-3 (page 1) 5. Lakhotia Ram Niwas (1974), Elements of Indian Income-Tax, Asha Publishing House, Calcutta-19 (page 1) 6. Harjeet Kaur (1992), Taxation and Development Finance in India, Classical Publishing Company, New Delhi. (page 129) 7. htpp:// 8. Vinay Kumar (1988), Tax System in India and Role of Income-Tax, Deep and Deep Publications, New Delhi. (page 136) 9. Ready Reckoners: Shri. V.G. Mehta, Shri. N.V. Mehta (For A.Y , A.Y to 86-87), Shri Kuber Publishing House, Bombay Raman Bissa (For A.Y ), Taxcom (India), Jodhpur (page ) 10. Ready Reckoners: Mehta V.G., Mehta N.V.(For A.Y , A.Y to 86-87), Shri Kuber Publishing House, Bombay Raman Bissa (For A.Y ), Taxcom (India), Jodhpur (page 399) 11. Ready Reckoner: Raman Bissa (For A.Y ), Taxcom (India), Jodhpur (page ) 43

25 12. Vinay Kumar (1988), Tax System in India and Role of Income-Tax, Deep and Deep Publications, New Delhi. (page 166) 13. Herekar P.M., Kulkarni S.S. (2010), A Simple Approach to Income- Tax (A.Y ), Phadake Prakashan, Kolhapur (page 462) 44

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